Expert Warns of Potential Yield Crisis at EigenLayer

Tokens used in EigenLayer’s liquid staking will need greater utility within the DeFi sector to avert a potential future yield crisis for the protocol, according to 3Jane DEX developer known as Chudnov.

1/ EigenLayer is facing a *major* yield crisis, and nobody is talking about it. @eigenlayer has >$15B in TVL but AVS’s will actually need less than *10%* of that for security, which means yields may fall off a cliff

— chudnov (@chudnovglavniy) April 22, 2024

The expert highlighted that EigenLayer is experiencing higher growth rates in terms of TVL than the active validation services (AVS) it supports. As a result, the protocol’s offered yield could sharply decline.

“EigenLayer’s TVL has exceeded $15 billion. […] The problem is that none of the AVS will need $1.5 billion for security, let alone $15 billion. The whole point of Proof-of-Stake is that the value locked in staking assets is higher than the potential profit from dishonest validator behavior. […] This means that [EigenLayer’s] yield could fall off a cliff,” the specialist warned.

According to the expert, the issue could be exacerbated by declining altcoin prices, as AVS would lack the incentive to maintain excess on-chain capital. An initial solution might involve a series of token launches to increase security budget requirements, which would only delay the problem.

Chudnov sees a permanent solution in increasing utility for LST and greater protocol interaction with the decentralized finance sector.

“If the [EigenLayer] ecosystem can become more deeply rooted in the DeFi ecosystem through [LRT] and financial primitives built on top of them, it will be a much more reliable positioning and give AVS more time to sort everything out at lower costs,” the expert concluded.

On April 10, developers launched EigenLayer and its data availability layer EigenDA (in beta) on the Ethereum mainnet.

On April 16, the team removed limits on all supported LST.

Unpausing starts now!

All Liquid Staking Token (LST) caps have been removed. LST restaking is now open.

Explore the uncapped LSTs or restake ETH natively through an EigenPod on the EigenLayer app at https://t.co/k9qHVJdRhlhttps://t.co/nonr4oi0Fz

— EigenLayer (@eigenlayer) April 16, 2024

EigenLayer ranks as the second-largest protocol by TVL on Ethereum after Lido, with a figure of $14.1 billion, according to DeFi Llama.

Previously, experts examined the impact of restaking on Ethereum’s on-chain metrics.

Back in February, the EigenLayer team secured $100 million in funding from Andreessen Horowitz, while project co-founder Sriram Kannan stated there were no plans to issue a native token.